Multiple Guideline Updates
In April and May, the AML/CFT Supervisors released updates in relation to the Beneficial Ownership Guideline, the Enhanced Customer Due Diligence Guideline, the Customer Due Diligence: Limited Partnerships Guideline, the Customer Due Diligence: Companies Guideline and the Customer Due Diligence: Trusts Guideline. This post focuses on key points in relation to each document.
Beneficial Ownership Guideline
Ultimate Ownership
A beneficial owner includes a person with ultimate ownership or control of the customer, whether directly or indirectly. The individual’s ownership or control may be indirect, for example through a nominee arrangement (formal or informal) or through several layers of ownership. A beneficial owner may be an individual who is not the legal owner of more than 25% of the customer and/or for whom there is no formal record of being a person with decision-making powers.
Person on Whose Behalf a Transaction Is Conducted
There is no requirement that you obtain and verify the identity of your customer’s underlying customer as part of your customer due diligence (CDD) obligations for beneficial owners, except when that underlying customer is a person who (directly or indirectly) has ultimate ownership or control of your customer. Nonetheless, you are still required to obtain and verify information relating to the underlying customer of your customer when enhanced CDD is triggered and the underlying customer is the potential source of funds (or wealth) of the particular transaction (and/or situation) that has triggered enhanced CDD.
Enhanced Customer Due Diligence Guideline
Termination
If you are not able to complete enhanced CDD for a customer, you must not carry out any occasional transaction or activity for them, nor establish a business relationship with them. If you already have a business relationship with the customer, this must be terminated.
As part of your programme, you should include your procedures, policies and controls for situations when enhanced CDD, or any other type of CDD, cannot be conducted. This should cover:
When enhanced CDD is unable to be conducted at on-boarding.
When the business relationship has been established and enhanced CDD was incorrectly conducted during on-boarding.
When enhanced CDD could not be conducted following a review during ongoing CDD and account monitoring or after a material change in the business relationship.
Termination should occur as soon as possible and when you terminate a relationship where funds or other assets have been received, you should return the funds or assets to the customer, even if the funds were received from a third party, unless the customer directs the funds to be paid to the source.
Simplified CDD
You must also conduct enhanced CDD in any circumstances ordinarily eligible for simplified CDD if there are grounds to report a suspicious activity.
Source of Wealth and Funds
Your compliance programme should determine when to examine your customer's source of wealth, when to examine their source of funds, or when to examine both. The Supervisors acknowledge it may not be possible to document every different scenario in your compliance programme in which you will examine source of wealth versus source of funds, or both; and a case-by-case determination depending on the identified risk may be preferable in some circumstances. The key consideration when determining whether the source of wealth and/or funds should be examined is which of them best enables you to effectively mitigate the ML/TF risks. You are not able to simply ‘choose’ the option that is the easiest to fulfil.
Additional Information
In some circumstances, obtaining and verifying information relating to the customer’s source of wealth and/or funds may not be sufficient to manage and mitigate the ML/TF risk. For these situations, you must carry out additional enhanced CDD measures before establishing, and during a business relationship.
Additional enhanced CDD measures to consider appropriate are (the list is not exhaustive):
obtaining further information from the customer in relation to a transaction; or
examining the purpose of a transaction; or
enhanced monitoring of a business relationship; or
obtaining senior management approval for transactions or to continue the business relationship.
‘Tipping Off’
There is no exemption from conducting enhanced CDD on the basis that it could inadvertently ‘tip off’ the customer that a suspicious activity report is going to be submitted (unless instructed by the Police). When conducted properly and in good faith, enquiries on the customer’s source of wealth and/or funds do not constitute ‘tipping off’. Maintaining clear and logical records of decisions made, by whom, and the reasons for them will help you demonstrate your appropriate handling of unusual or suspicious activities.
Customer Due Diligence: Limited Partnerships Guideline
As part of your new obligations, you must obtain, and according to the level of risk verify, information relating to:
the limited partnership’s legal form and proof of existence;
the limited partnership’s ownership and control structure;
any powers that bind and regulate the limited partnership; and
the existence and name of any nominee general partner.
Documents that can be used to verify such information are the limited partnership agreement and any deeds of accession or amendment. For New Zealand registered limited partnerships, the limited partnership agreement is not available on the Limited Partnerships Register. Therefore, there may not be an independent source from which you can verify the information recorded on the limited partnership agreement. You can therefore use information or documents issued by the limited partnership itself, including its limited partnership agreement.
Moreover, for the existence and name of any nominee general partner, you are only required to verify this using information, documents or data issued by a reliable source. It does not need to be independent. You can therefore use information, documents or data issued by the limited partnership. This may include:
written confirmation from another partner confirming the name of the nominee general partner.
written confirmation of any nominee relationship(s) (formal or informal).
a copy of a written agreement in place between any nominees and the person whose instructions or directions the nominee follows or is accustomed to follow.
Customer Due Diligence: Companies Guideline
As part of your new obligations, you must obtain, and according to the level of risk verify, information relating to:
the company’s legal form and proof of existence;
the company’s ownership and control structure;
any powers that bind and regulate the company; and
the existence and name of any nominee directors or nominee shareholders.
Documents that can be used to verify this information are the company’s extract and the company constitution or shareholders agreement (or equivalent).
In relation to the existence and name of any nominee director or nominee shareholder, you are only required to verify this using information, documents or data issued by a reliable source. It does not need to be independent. You can therefore use information, documents or data issued by the company. This may include:
written confirmation from another director confirming the name of the nominee director.
written confirmation of any nominee relationship(s) (formal or informal).
a copy of a written agreement in place between any nominees and the person whose instructions or directions the nominee follows or is accustomed to follow.
Customer Due Diligence: Trusts Guideline
Ownership Structure
As part of your new obligations, you must obtain information on:
the trust’s legal form and proof of existence;
the trust’s ownership and control structure;
the powers that bind and regulate the trust, this could be the trust deed and any deeds of appointment or amendment.
To verify such information you should use the trust deed and any deeds of appointment or amendment.
Beneficial Owners
A beneficial owner is the individual(s) (i.e. a natural person(s)) who ultimately owns or controls the trust. Where ‘control’ means a power (whether exercisable alone or jointly with another person or with the consent of another person) under the trust deed or other trust instrument or by law to:
dispose of or invest (other than as an investment manager) trust property;
direct, make or approve trust distributions;
vary or terminate the trust;
add or remove a person as a beneficiary or to or from a class of beneficiaries; and/or
appoint or remove trustees.
Settlors
Settlors are natural or legal persons who transfer ownership of their assets to trustees by means of a trust deed or similar arrangement. A person is also a settlor if they have provided (or undertaken to provide) property or funds for the trust. This requires an element of bounty (i.e., the settlor must intend to provide some form of benefit rather than being an independent third party transferring something to the trust for full consideration). A settlor is generally understood as the person (or persons) establishing a trust. A settlor may be a beneficial owner of the trust (depending on the terms of the trust) if they have effective control, or not.
A settlor may or may not be named in the trust deed. You should also be aware it is possible that the settlor named as such in a trust deed or other instrument is not the real ‘economic settlor’ i.e., the named settlor is effectively only acting as a ‘nominee’ for the real economic settlor who is the real owner of the assets contributed to the trust. In these instances, additional consideration may be needed as to how to identify the economic settlor (according to the level of risk). Any economic settlor will also be relevant for your obligations to obtain and verify information regarding the source of wealth and/or funds of the customer.
Verification of Settlor and Protector
In relation to the settlor(s) and any protector(s) of the trust, the verification must be on the basis of data, documents or information from a reliable and independent source. For a settlor or protector that is a legal person(e.g., a company), you may be able to utilise publicly available information, such as on a Corporate Register. For a legal arrangement (e.g., a trust), you could utilise a copy of relevant formation documents provided by your customer.
If the settlor or protector is a natural person (i.e., an individual), you should obtain their identity document. If you are satisfied the settlor and/or a protector are not a beneficial owner (i.e. cannot exercise ultimate or effective control over the trust) and they do not have a material impact on the overall level of risk of the trust, you do not need to obtain their identity documents.
What’s Next?
Get in touch if you have any questions on the updated guidelines.
